Notes 12/5: FTX and Alameda, Binance’s BNB Shorts

Recent reports have made clear that the crux of problems at FTX was its relationship with Alameda Research, FTX co-founder Sam Bankman-Fried’s (SBF) other company. The nature of that relationship is still unclear, however.

Bankman-Fried has hinted at some aspects of that relationship in his interviews. But details are not forthcoming; Bankman-Fried claims to be an overworked CEO without much knowledge of his company’s financials.

Alameda and FTX: A Cozy Relationship

In his latest WSJ interview, he admitted that FTX customers routed more than $5 billion via Alameda to fund their accounts because the exchange did not have banking relationships in its early years. [Subsequently, the exchange seems to have used the services of Silvergate Bank, Signature Bank, and Deltec Bank among others]. Alameda seems to have acquired companies and quasi-banking outfits across the world to facilitate the funds transfer.

For example, this report by online publication Protos details how the purchase of an over-the-counter (OTC) trading desk in Australia helped FTX customers put money into their accounts. The transferred funds were double counted, meaning they were added to the balance sheets of both firms. Presumably, the double counting of funds also inflated positions and revenues at both companies.   

That is the picture of FTX’s operations we get from the WSJ interview. But that still does not explain the $8 billion hole, the amount mentioned in most news reports, in FTX’s balance sheet.

That hole is largely a function of a decline the value of tokens that FTX held as collateral for Alameda’s position. SBF told The Block’s Frank Chapparo that he did not have knowledge of Alameda’s growing position at the exchange because customer positions were not part of FTX’s balance sheet. “Those were not part of FTX’s assets or liabilities, they were customer assets or liabilities and so FTX’s financials were not directly impacted by this,” he said.

Shorts Are Increasing on Binance’s BNB Token

In its design and function, Binance’s BNB token is like FTT – the token that caused FTX’s downfall.

It is the native token of an unregulated exchange. It is used to offer trading discounts and other benefits at the exchange but does not have any utility outside the platform. Its price inflated last year amid an overall boom in crypto markets but there are no logical reasons for investor enthusiasm about the token’s prospects. No wonder then, it has recently become a target for short sellers.

In its note today, Kaiko Research wrote that short positions on BNB tokens have increased as “their purpose comes under more scrutiny than ever.” A BNB price crash could bring down Binance and make it another big player to fall by the wayside in crypto.

The Case Against BNB

Like most crypto tokens, BNB relies on faulty economics to maintain its price. It balances supply and demand through a mint and burn operation. The token has a supply limit of 1 billion tokens. New tokens are added to artificially inflate supply to that limit while old tokens are burnt to create demand. Theoretically, that approach might have some success if there was increasing demand for the token.

But we don’t have a window into BNB demand. Order books and customer counts might provide indicators, but cryptocurrency exchanges regularly fudge these figures.

BNB’s utility is also questionable within Binance because the exchange’s trading volumes have been questioned before. It is also home to several altcoins with thinly traded volumes, hardly the sort of asset tokens that might throw off significant profits even with fee discounts.

BNB is also supposed to be used as a payment mechanism to purchase products but there is no publicly available data on sales made using the token. A hack earlier this year that enabled minting of new BNB tokens by outside actors also put a glaring spotlight on its compromised security. Its value, in other words, is as questionable as that of FTT.

Let’s hope Binance does not use the token as collateral for its business ventures.

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